Loans

9 Months Ended

Sep. 30, 2019

Receivables [Abstract]

Loans

Loans

Loans were as follows:

	September 30, 2019		Percentage of Total		December 31, 2018		Percentage of Total
Commercial and industrial	$	5,179,780	35.4	%	$	5,111,957	36.3	%
Energy:
Production	1,282,180		8.7		1,309,314		9.3
Service	189,350		1.3		168,775		1.2
Other	75,388		0.5		124,509		0.9
Total energy	1,546,918		10.5		1,602,598		11.4
Commercial real estate:
Commercial mortgages	4,555,171		31.1		4,121,966		29.2
Construction	1,370,206		9.4		1,267,717		9.0
Land	290,706		2.0		306,755		2.2
Total commercial real estate	6,216,083		42.5		5,696,438		40.4
Consumer real estate:
Home equity loans	363,224		2.5		353,924		2.5
Home equity lines of credit	350,461		2.4		337,168		2.4
Other	458,618		3.1		427,898		3.0
Total consumer real estate	1,172,303		8.0		1,118,990		7.9
Total real estate	7,388,386		50.5		6,815,428		48.3
Consumer and other	519,844		3.6		569,750		4.0
Total loans	$	14,634,928	100.0	%	$	14,099,733	100.0	%

Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of September 30, 2019, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 10.5% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.3 billion and $66.1 million, respectively, as of September 30, 2019.

Foreign Loans. We have U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at September 30, 2019 or December 31, 2018.

Related Party Loans. In the ordinary course of business, we have granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). Such loans totaled $326.1 million at September 30, 2019 and $256.1 million at December 31, 2018.

Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:

	September 30, 2019		December 31, 2018
Commercial and industrial	$	13,929	$	9,239
Energy	70,883		46,932
Commercial real estate:
Buildings, land and other	9,240		15,268
Construction	697		—
Consumer real estate	527		892
Consumer and other	2,170		1,408
Total	$	97,446	$	73,739

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $0.9 million and $3.0 million for the three and nine months ended September 30, 2019, compared to $1.3 million and $4.2 million for the three and nine months ended September 30, 2018.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 30, 2019 was as follows:

	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and industrial	$	39,540	$	13,622	$	53,162	$	5,126,618	$	5,179,780	$	3,574
Energy	3,350		21,836		25,186		1,521,732		1,546,918		530
Commercial real estate:
Buildings, land and other	29,147		8,279		37,426		4,808,451		4,845,877		6,513
Construction	1,412		1,471		2,883		1,367,323		1,370,206		774
Consumer real estate	8,305		2,443		10,748		1,161,555		1,172,303		2,150
Consumer and other	7,815		2,419		10,234		509,610		519,844		855
Total	$	89,569	$	50,070	$	139,639	$	14,495,289	$	14,634,928	$	14,396

Impaired Loans. Impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
September 30, 2019
Commercial and industrial	$	15,020	$	4,874	$	7,280	$	12,154	$	5,785
Energy	88,531		4,777		65,800		70,577		19,722
Commercial real estate:
Buildings, land and other	9,553		3,864		5,015		8,879		1,483
Construction	697		697		—		697		—
Consumer real estate	293		293		—		293		—
Consumer and other	2,171		—		2,170		2,170		2,170
Total	$	116,265	$	14,505	$	80,265	$	94,770	$	29,160
December 31, 2018
Commercial and industrial	$	9,094	$	2,842	$	4,287	$	7,129	$	2,558
Energy	67,900		6,817		39,890		46,707		9,671
Commercial real estate:
Buildings, land and other	15,774		2,168		12,517		14,685		2,599
Construction	—		—		—		—		—
Consumer real estate	293		293		—		293		—
Consumer and other	1,475		—		1,407		1,407		1,407
Total	$	94,536	$	12,120	$	58,101	$	70,221	$	16,235

The average recorded investment in impaired loans was as follows:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2019		2018		2019		2018
Commercial and industrial	$	14,438	$	13,447	$	12,552	$	21,025
Energy	55,195		78,772		50,642		82,640
Commercial real estate:
Buildings, land and other	9,418		14,306		14,961		12,328
Construction	349		—		277		—
Consumer real estate	293		671		541		807
Consumer and other	1,795		1,073		1,605		805
Total	$	81,488	$	108,269	$	80,578	$	117,605

Troubled Debt Restructurings. Troubled debt restructurings during the nine months ended September 30, 2019 and September 30, 2018 are set forth in the following table.

	Nine Months Ended   September 30, 2019				Nine Months Ended   September 30, 2018
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	3,845	$	2,188	$	2,203	$	—
Energy	—		—		13,708		—
Commercial real estate:
Buildings, land and other	9,456		9,494		—		—
Consumer real estate	124		123		—		—
	$	13,425	$	11,805	$	15,911	$	—

Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses.

Additional information related to restructured loans as of or for the three months ended September 30, 2019 and September 30, 2018 is set forth in the following table.

	September 30, 2019		September 30, 2018
Restructured loans past due in excess of 90 days at period-end:
Number of loans	4		—
Dollar amount of loans	$	3,244	$	—
Restructured loans on non-accrual status at period end	5,645		—
Charge-offs of restructured loans:
Recognized in connection with restructuring	1,500		—
Recognized on previously restructured loans	—		4,650
Proceeds from sale of restructured loans	—		15,750

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (see details above), (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the State of Texas.

We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our 2018 Form 10-K. In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, we monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers review updated financial information for all pass grade loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis.

The following tables present weighted-average risk grades for all commercial loans by class.

	September 30, 2019			December 31, 2018
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.19	$	4,856,712	6.12	$	4,862,275
Risk grade 9	9.00	165,195		9.00	112,431
Risk grade 10	10.00	75,276		10.00	58,328
Risk grade 11	11.00	68,668		11.00	69,684
Risk grade 12	12.00	8,144		12.00	6,681
Risk grade 13	13.00	5,785		13.00	2,558
Total	6.42	$	5,179,780	6.30	$	5,111,957
Energy
Risk grades 1-8	5.85	$	1,379,566	5.76	$	1,451,673
Risk grade 9	9.00	80,170		9.00	35,565
Risk grade 10	10.00	1,105		10.00	43,001
Risk grade 11	11.00	15,194		11.00	25,427
Risk grade 12	12.00	51,161		12.00	37,261
Risk grade 13	13.00	19,722		13.00	9,671
Total	6.36	$	1,546,918	6.22	$	1,602,598
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.78	$	4,528,963	6.76	$	4,143,264
Risk grade 9	9.00	117,739		9.00	109,660
Risk grade 10	10.00	97,083		10.00	62,353
Risk grade 11	11.00	92,852		11.00	98,176
Risk grade 12	12.00	7,757		12.00	12,669
Risk grade 13	13.00	1,483		13.00	2,599
Total	6.99	$	4,845,877	6.98	$	4,428,721
Construction
Risk grades 1-8	7.19	$	1,314,076	7.13	$	1,177,260
Risk grade 9	9.00	31,506		9.00	60,754
Risk grade 10	10.00	21,686		10.00	24,877
Risk grade 11	11.00	2,241		11.00	4,826
Risk grade 12	12.00	697		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.28	$	1,370,206	7.29	$	1,267,717

Net (charge-offs)/recoveries, segregated by class of loans, were as follows:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Commercial and industrial	$	(1,520	)	$	(7,807	)	$	(5,912	)	$	(19,030	)
Energy	(1,260		)	(5,347		)	(3,184		)	(10,272		)
Commercial real estate:
Buildings, land and other	38			33			(466		)	(288		)
Construction	8			3			14			11
Consumer real estate	(103		)	(388		)	(2,078		)	(1,078		)
Consumer and other	(3,534		)	(1,792		)	(9,351		)	(4,975		)
Total	$	(6,371	)	$	(15,298	)	$	(20,977	)	$	(35,632	)

In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index (“TLI”), which is produced by the Federal Reserve Bank of Dallas. The TLI, the components of which are more fully described in our 2018 Form 10-K, totaled 128.1 at September 30, 2019 and 126.4 at December 31, 2018. A higher TLI value implies more favorable economic conditions.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of inherent losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our 2018 Form 10-K, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

The following table presents details of the allowance for loan losses allocated to each portfolio segment as of September 30, 2019 and December 31, 2018 and detailed on the basis of the impairment evaluation methodology we used:

	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other			Total
September 30, 2019
Historical valuation allowances	$	28,872	$	7,422	$	22,051	$	2,641	$	7,545		$	68,531
Specific valuation allowances	5,785		19,722		1,483		—		2,170			29,160
General valuation allowances	10,866		4,120		4,349		1,172		(325		)	20,182
Macroeconomic valuation allowances	7,144		2,082		7,470		1,071		919			18,686
Total	$	52,667	$	33,346	$	35,353	$	4,884	$	10,309		$	136,559
Allocated to loans:
Individually evaluated	$	5,785	$	19,722	$	1,483	$	—	$	2,170		$	29,160
Collectively evaluated	46,882		13,624		33,870		4,884		8,139			107,399
Total	$	52,667	$	33,346	$	35,353	$	4,884	$	10,309		$	136,559
December 31, 2018
Historical valuation allowances	$	25,351	$	9,697	$	20,817	$	2,688	$	6,845		$	65,398
Specific valuation allowances	2,558		9,671		2,599		—		1,407			16,235
General valuation allowances	10,062		6,014		4,366		1,671		(13		)	22,100
Macroeconomic valuation allowances	10,609		3,670		10,995		1,744		1,381			28,399
Total	$	48,580	$	29,052	$	38,777	$	6,103	$	9,620		$	132,132
Allocated to loans:
Individually evaluated	$	2,558	$	9,671	$	2,599	$	—	$	1,407		$	16,235
Collectively evaluated	46,022		19,381		36,178		6,103		8,213			115,897
Total	$	48,580	$	29,052	$	38,777	$	6,103	$	9,620		$	132,132

Our recorded investment in loans as of September 30, 2019 and December 31, 2018 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology we used was as follows:

	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
September 30, 2019
Individually evaluated	$	12,154	$	70,577	$	9,576	$	293	$	2,170	$	94,770
Collectively evaluated	5,167,626		1,476,341		6,206,507		1,172,010		517,674		14,540,158
Total	$	5,179,780	$	1,546,918	$	6,216,083	$	1,172,303	$	519,844	$	14,634,928
December 31, 2018
Individually evaluated	$	7,129	$	46,707	$	14,685	$	293	$	1,407	$	70,221
Collectively evaluated	5,104,828		1,555,891		5,681,753		1,118,697		568,343		14,029,512
Total	$	5,111,957	$	1,602,598	$	5,696,438	$	1,118,990	$	569,750	$	14,099,733

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Commercial and Industrial			Energy			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Total
Three months ended:
September 30, 2019
Beginning balance	$	57,714		$	25,818		$	35,914		$	5,637		$	9,846		$	134,929
Provision for loan losses	(3,527		)	8,788			(607		)	(650		)	3,997			8,001
Charge-offs	(2,705		)	(2,000		)	—			(557		)	(6,357		)	(11,619		)
Recoveries	1,185			740			46			454			2,823			5,248
Net charge-offs	(1,520		)	(1,260		)	46			(103		)	(3,534		)	(6,371		)
Ending balance	$	52,667		$	33,346		$	35,353		$	4,884		$	10,309		$	136,559
September 30, 2018
Beginning balance	$	57,713		$	37,313		$	38,918		$	6,336		$	9,946		$	150,226
Provision for loan losses	1,085			(521		)	250			246			1,590			2,650
Charge-offs	(8,491		)	(5,400		)	—			(431		)	(4,274		)	(18,596		)
Recoveries	684			53			36			43			2,482			3,298
Net charge-offs	(7,807		)	(5,347		)	36			(388		)	(1,792		)	(15,298		)
Ending balance	$	50,991		$	31,445		$	39,204		$	6,194		$	9,744		$	137,578
Nine months ended:
September 30, 2019
Beginning balance	$	48,580		$	29,052		$	38,777		$	6,103		$	9,620		$	132,132
Provision for loan losses	9,999			7,478			(2,972		)	859			10,040			25,404
Charge-offs	(8,782		)	(4,000		)	(617		)	(2,936		)	(17,157		)	(33,492		)
Recoveries	2,870			816			165			858			7,806			12,515
Net charge-offs	(5,912		)	(3,184		)	(452		)	(2,078		)	(9,351		)	(20,977		)
Ending balance	$	52,667		$	33,346		$	35,353		$	4,884		$	10,309		$	136,559
September 30, 2018
Beginning balance	$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
Provision for loan losses	10,407			(9,811		)	8,533			1,615			7,102			17,846
Charge-offs	(21,896		)	(10,939		)	(619		)	(1,632		)	(12,240		)	(47,326		)
Recoveries	2,866			667			342			554			7,265			11,694
Net charge-offs	(19,030		)	(10,272		)	(277		)	(1,078		)	(4,975		)	(35,632		)
Ending balance	$	50,991		$	31,445		$	39,204		$	6,194		$	9,744		$	137,578